Tax Return Preparer Due Diligence Penalty Under Section 6695(g), 33875-33879 [2018-15351]

Download as PDF Federal Register / Vol. 83, No. 138 / Wednesday, July 18, 2018 / Proposed Rules acceptable safety margins, and out of the context of RNP–AR operations could lead to an unusually high pilot workload. (f) Compliance Comply with this AD within the compliance times specified, unless already done. (g) Definitions For the purposes of this AD, the definitions in paragraphs (g)(1) through (g)(3) of this AD apply. (1) Group 1 airplanes are those that have Flight Management Guidance Envelope Computer (FMGEC) standard P5H3 (Airbus Modification 204758 Part Number (P/N) FMGEC C13226HA07 with P/N FMS operational SW PS4087700–906) embodied in production, or embodied in service as specified in Airbus Service Bulletin A330– 22–3209; or Airbus Service Bulletin A330– 22–3225; or Airbus Service Bulletin A330– 22–3244; or Airbus Service Bulletin A330– 22–3247; or Airbus Service Bulletin A330– 22–3262, except those that have RNP–AR. (2) Group 2 airplanes have the same configuration as those in Group 1, but in addition have RNP–AR (Airbus Modification 203441, or Airbus Modification 203442, or Airbus Modification 200624) embodied in production or Airbus Service Bulletin A330– 34–3262; or Airbus Service Bulletin A330– 34–3308; or Airbus Service Bulletin A330– 34–3345, embodied in service. (3) Group 3 airplanes are those in any configuration other than that identified in paragraph (g)(1) or (g)(2) of this AD. amozie on DSK3GDR082PROD with PROPOSALS1 (h) Airplane Flight Manual (AFM) Revision For Group 2 airplanes: Within 30 days after the effective date of this AD, revise the Limitations section of the Airbus A330/A340 Airplane Flight Manual (AFM) to include the information in Temporary Revision TR774, RNP–AR Operations Forbidden with FMGEC Standard P5H3, Issue 1, approved October 13, 2017 (‘‘TR774’’), and inform all flight crews, and, thereafter, operate the airplane accordingly, as specified in the TR. TR774 prohibits the RNP–AR operation on Airbus A330 airplanes equipped with FMGEC standard P5H3. Revising the AFM to include TR774 may be done by inserting a copy of TR774 in the AFM. When this TR has been included in general revisions of the AFM, the general revisions may be inserted in the AFM, provided the relevant information in the general revision is identical to that in TR774, and the TR may be removed. (i) FMS Software Modification (1) For Group 1 and Group 2 airplanes: Within 60 days after the effective date of this AD, modify the airplane by installing FMS software P4A (P/N FMS operational SW PS4087700–905) on FMGEC standard P5H3 (P/N FMGEC C13226HA07 with P/N FMS operational SW PS4087700–906) in accordance with the instructions of Airbus Service Bulletin A330–22–3264, dated March 14, 2018. (2) For Group 2 airplanes: After modification of an airplane as required by paragraph (i)(1) of this AD, the AFM revision required by paragraph (h) of this AD may be removed from the AFM of that airplane. VerDate Sep<11>2014 17:43 Jul 17, 2018 Jkt 244001 (j) Optional Modification For Group 3 airplanes: From the effective date of this AD, it is allowed to modify any airplane into a Group 1 or Group 2 configuration, provided that, concurrently, that airplane is modified in accordance with the Accomplishment Instructions of Airbus Service Bulletin A330–22–3264, dated March 14, 2018. (k) Credit for Previous Actions This paragraph provides credit for the actions required by paragraph (i) of this AD and optional actions specified in paragraph (j) of this AD, if those actions were performed before the effective date of this AD using Airbus Alert Operators Transmission—AOT A22L002–17, dated October 20, 2017. (l) Other FAA AD Provisions The following provisions also apply to this AD: (1) Alternative Methods of Compliance (AMOCs): The Manager, International Section, Transport Standards Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the International Section, send it to the attention of the person identified in paragraph (m)(2) of this AD. Information may be emailed to: 9-ANM-116-AMOCREQUESTS@faa.gov. Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office. (2) Contacting the Manufacturer: For any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, International Section, Transport Standards Branch, FAA; or the European Aviation Safety Agency (EASA); or Airbus’s EASA Design Organization Approval (DOA). If approved by the DOA, the approval must include the DOAauthorized signature. (3) Required for Compliance (RC): If any service information contains procedures or tests that are identified as RC, those procedures and tests must be done to comply with this AD; any procedures or tests that are not identified as RC are recommended. Those procedures and tests that are not identified as RC may be deviated from using accepted methods in accordance with the operator’s maintenance or inspection program without obtaining approval of an AMOC, provided the procedures and tests identified as RC can be done and the airplane can be put back in an airworthy condition. Any substitutions or changes to procedures or tests identified as RC require approval of an AMOC. (m) Related Information (1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA AD 2017–0233, dated November 23, 2017, for related information. This MCAI may be found in the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA–2018–0584. PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 33875 (2) For more information about this AD, contact Vladimir Ulyanov, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone and fax 206–231–3229. (3) For service information identified in this AD, contact Airbus SAS, Airworthiness Office—EAL, 2 Rond-Point Emile Dewoitine, 31700 Blagnac, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 45 80; email airworthiness.A330-A340@airbus.com; internet http://www.airbus.com. You may view this service information at the FAA, Transport Standards Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206–231–3195. Issued in Des Moines, Washington, on June 22, 2018. Michael Kaszycki, Acting Director, System Oversight Division, Aircraft Certification Service. [FR Doc. 2018–14408 Filed 7–17–18; 8:45 am] BILLING CODE 4910–13–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–103474–18] RIN 1545–BO63 Tax Return Preparer Due Diligence Penalty Under Section 6695(g) Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking, partial withdrawal of notice of proposed rulemaking. AGENCY: This document contains proposed regulations that amend portions of previously proposed regulations related to the tax return preparer penalty under section 6695(g) of the Internal Revenue Code (Code). These amendments to the previously proposed regulations are necessary to implement a recent law change that expands the scope of the tax return preparer due diligence penalty under section 6695(g) so that it applies with respect to eligibility to file a return or claim for refund as head of household. The proposed regulations affect tax return preparers. DATES: Written or electronic comments and requests for a public hearing must be received by August 17, 2018. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–103474–18), Room 5207, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through SUMMARY: E:\FR\FM\18JYP1.SGM 18JYP1 33876 Federal Register / Vol. 83, No. 138 / Wednesday, July 18, 2018 / Proposed Rules Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–103474– 18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224, or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (IRS REG–103474– 18). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Marshall French, 202–317–6845; concerning submissions of comments and requests for a public hearing, Regina Johnson, 202–317–6901 (not tollfree numbers). Paperwork Reduction Act The collection of information in current § 1.6695–2 was previously reviewed and approved under control number 1545–1570. Control number 1545–1570 was discontinued in 2014, as the burden for the collection of information contained in § 1.6695–2 is reflected in the burden for Form 8867, ‘‘Paid Preparer’s Due Diligence Checklist,’’ under control number 1545– 1629. SUPPLEMENTARY INFORMATION: amozie on DSK3GDR082PROD with PROPOSALS1 Background This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 6695(g) of the Code regarding the tax return preparer due diligence requirements. Prior to 2016, section 6695(g) imposed a penalty on tax return preparers who fail to comply with due diligence requirements set forth in regulations prescribed by the Secretary with respect to determining eligibility for, or the amount of, the earned income credit (EIC). For tax years beginning after December 31, 2015, the scope of section 6695(g) was expanded to apply the penalty to tax return preparers who fail to comply with due diligence requirements with respect to determining eligibility for, or the amount of, the child tax credit (CTC)/ additional child tax credit (ACTC) and the American opportunity tax credit (AOTC). See section 207 of the Protecting Americans from Tax Hikes Act of 2015, Div. Q of Public Law 114– 113 (129 Stat. 2242, 3082 (2015)) (PATH Act). On December 5, 2016, final and temporary regulations (TD 9799, 81 FR 87444) with cross-referencing proposed regulations (REG–102952–16, 81 FR 87502) (2016 proposed regulations) were published in the Federal Register to reflect these changes. Effective for tax years beginning after December 31, 2017, section 6695(g) was VerDate Sep<11>2014 17:43 Jul 17, 2018 Jkt 244001 amended to further expand the scope of the penalty to tax return preparers who fail to comply with due diligence requirements with respect to determining eligibility to file as head of household (as defined in section 2(b)). See section 11001(b) of ‘‘An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,’’ Public Law 115–97 (131 Stat. 2054, 2058 (2017)) (Act). This document contains proposed regulations to reflect this change. Explanation of Provisions The proposed regulations contained in this document withdraw paragraphs (a), (b)(3), and (e) of § 1.6695–2 of the 2016 proposed regulations and propose in their place new paragraphs (a), (b)(3), and (e) of § 1.6695–2 (amended paragraphs). The amended paragraphs update the 2016 proposed regulations to reflect the recent change in the law that expands the tax return preparer due diligence requirements under section 6695(g) to apply to determining eligibility to file as head of household. Accordingly, the proposed regulations contained in this document amend paragraphs (a) and (b)(3) of § 1.6695–2 of the 2016 proposed regulations by adding a reference to determining eligibility to file as head of household where reference is made to determining eligibility for, or the amount of, the EIC, the CTC/ACTC and/or the AOTC. In addition, Example 5 in paragraph (b)(3)(ii) of § 1.6695–2 of the 2016 proposed regulations is revised to demonstrate how head of household due diligence requirements are intertwined with the rules for determining a taxpayer’s eligibility for the CTC. A new example is also added to § 1.6695–2(a)(2) to illustrate how the penalty applies if there is a failure to satisfy the due diligence requirements with respect to determining eligibility to file as head of household in addition to a failure to satisfy the due diligence requirements with respect to one of the applicable credits. As explained in the preamble of the 2016 temporary regulations, the preparation of one return or claim for refund may result in the imposition of more than one penalty under section 6695(g). That is because under section 6695(g), each failure to comply with the due diligence requirements set forth in regulations prescribed by the Secretary results in a separate penalty. To illustrate this point, a new example, Example 3, is added to proposed § 1.6695–2(a)(2) contained in this document. PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 The applicability date in § 1.6695–2(e) is also updated to reflect the effective date of the addition of determining eligibility to file as head of household to the due diligence requirements. Accordingly, proposed § 1.6695–2(e) contained in this document provides that § 1.6695–2 applies to tax returns and claims for refund for taxable years beginning after December 31, 2015, that are prepared on or after the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register. However, the rules relating to the determination of a taxpayer’s eligibility to file as head of household under section 2(b) apply to tax returns and claims for refund for taxable years beginning after December 31, 2017, that are prepared on or after the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register. As part of satisfying the due diligence requirements, the regulations under § 1.6695–2 require tax return preparers to complete the Form 8867, ‘‘Paid Preparer’s Due Diligence Checklist,’’ and, in most cases, attach it to the relevant return or claim for refund as part of satisfying the section 6695(g) due diligence requirements. The Form 8867 underwent significant revisions for the 2016 tax year and is currently a single checklist to be used for all applicable credits (namely, the EIC, the CTC/ ACTC, and the AOTC) on the return or claim for refund subject to the section 6695(g) due diligence requirements. It is anticipated that the IRS will revise the Form 8867 to include the head of household filing status in time for the 2019 filing season. Proposed Applicability Dates Proposed § 1.6695–2(e) provides that the rules in this notice of proposed rulemaking with respect to determining eligibility to file as head of household under section 2(b) will apply to tax returns and claims for refund for taxable years beginning after December 31, 2017, that are prepared on or after the date the final regulations are published in the Federal Register. Special Analyses This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations. Under the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that these proposed rules, if adopted, would not E:\FR\FM\18JYP1.SGM 18JYP1 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 138 / Wednesday, July 18, 2018 / Proposed Rules have a significant economic impact on a substantial number of small entities. When an agency issues a notice of proposed rulemaking, the RFA requires the agency to ‘‘prepare and make available for public comment an initial regulatory flexibility analysis’’ that will ‘‘describe the impact of the proposed rule on small entities.’’ (5 U.S.C. 603(a)). Section 605 of the RFA provides an exception to this requirement if the agency certifies that the proposed rulemaking will not have a significant economic impact on a substantial number of small entities. The proposed rules affect paid tax return preparers who determine a taxpayer is eligible to file as head of household, in addition to those tax return preparers who determine eligibility for, or the amount of, the EIC, the CTC/ACTC, and/or the AOTC. The North American Industry Classification System (NAICS) code that relates to tax return preparation services (NAICS code 541213) is the appropriate code for tax return preparers subject to this notice of proposed rulemaking. Entities identified as tax return preparation services are considered small under the Small Business Administration size standards (13 CFR 121.201) if their annual revenue is less than $20.5 million. The IRS estimates that approximately 75 to 85 percent of the 505,000 persons who work at firms or are self-employed tax return preparers are operating as or employed by small entities. The IRS has therefore determined that these proposed rules will have an impact on a substantial number of small entities. The IRS has further determined, however, that the economic impact on entities affected by the proposed rules will not be significant. The current final and temporary regulations under section 6695(g) already require tax return preparers to complete the Form 8867 when a return or claim for refund includes a claim of the EIC, the CTC/ ACTC, and/or the AOTC. Tax return preparers also must currently maintain records of the checklists and computations, as well as a record of how and when the information used to compute the credits was obtained by the tax return preparer. The information needed to document a taxpayer’s eligibility to file as head of household is information the preparer must gather to file the return. Even if certain preparers are required to maintain the checklists and complete Form 8867 for the first time, the IRS estimates that the total time required should be minimal for these tax return preparers. Further, the IRS does not expect that the requirements in these proposed regulations would necessitate the VerDate Sep<11>2014 17:43 Jul 17, 2018 Jkt 244001 purchase of additional software or equipment in order to meet the additional information retention requirements. Based on these facts, the IRS hereby certifies that the collection of information contained in this notice of proposed rulemaking will not have a significant economic impact on a substantial number of small entities. Accordingly, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact on small business. Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written and electronic comments that are timely submitted to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register. Drafting Information The principal author of these regulations is Rachel Gregory of the Office of the Associate Chief Counsel (Procedure and Administration). List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Partial Withdrawal of a Notice of Proposed Rulemaking Accordingly, under the authority of 26 U.S.C. 7805, § 1.6695–2(a), (b)(3), and (e) of the notice of proposed rulemaking (REG–102952–16) published in the Federal Register on December 5, 2016 (81 FR 87502) are withdrawn. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 33877 Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.6695–2 is amended by revising the section heading and paragraphs (a), (b)(3), and (e) to read as follows: ■ § 1.6695–2 Tax return preparer due diligence requirements for certain returns and claims. (a) Penalty for failure to meet due diligence requirements—(1) In general. A person who is a tax return preparer (as defined in section 7701(a)(36)) of a tax return or claim for refund under the Internal Revenue Code who determines the taxpayer’s eligibility to file as head of household under section 2(b), or who determines the taxpayer’s eligibility for, or the amount of, the child tax credit (CTC)/additional child tax credit (ACTC) under section 24, the American opportunity tax credit (AOTC) under section 25A(i), or the earned income credit (EIC) under section 32, and who fails to satisfy the due diligence requirements of paragraph (b) of this section will be subject to a penalty as prescribed in section 6695(g) (indexed for inflation under section 6695(h)) for each failure. A separate penalty applies to a tax return preparer with respect to the head of household filing status determination and to each applicable credit claimed on a return or claim for refund for which the due diligence requirements of this section are not satisfied and for which the exception to penalty provided by paragraph (d) of this section does not apply. (2) Examples. The provisions of paragraph (a)(1) of this section are illustrated by the following examples: Example 1. Preparer A prepares a federal income tax return for a taxpayer claiming the CTC and the AOTC. Preparer A did not meet the due diligence requirements under this section with respect to the CTC or the AOTC claimed on the taxpayer’s return. Unless the exception to penalty provided by paragraph (d) of this section applies, Preparer A is subject to two penalties under section 6695(g): One for failure to meet the due diligence requirements for the CTC and a second penalty for failure to meet the due diligence requirements for the AOTC. Example 2. Preparer B prepares a federal income tax return for a taxpayer claiming the CTC and the AOTC. Preparer B did not meet the due diligence requirements under this section with respect to the CTC claimed on the taxpayer’s return, but Preparer B did meet the due diligence requirements under this section with respect to the AOTC claimed on the taxpayer’s return. Unless the exception to penalty provided by paragraph (d) of this section applies, Preparer B is subject to one penalty under section 6695(g) for the failure to meet the due diligence requirements for the CTC. Preparer B is not E:\FR\FM\18JYP1.SGM 18JYP1 33878 Federal Register / Vol. 83, No. 138 / Wednesday, July 18, 2018 / Proposed Rules subject to a penalty under section 6695(g) for failure to meet the due diligence requirements for the AOTC. Example 3. Preparer C prepares a federal income tax return for a taxpayer using the head of household filing status and claiming the CTC and the AOTC. Preparer C did not meet the due diligence requirements under this section with respect to the head of household filing status and the CTC claimed on the taxpayer’s return. Preparer C did meet the due diligence requirements under this section with respect to the AOTC claimed on the taxpayer’s return. Unless the exception to penalty provided by paragraph (d) of this section applies, Preparer C is subject to two penalties under section 6695(g) for the failure to meet the due diligence requirements: One for the head of household filing status and one for the CTC. Preparer C is not subject to a penalty under section 6695(g) for failure to meet the due diligence requirements for the AOTC. amozie on DSK3GDR082PROD with PROPOSALS1 (b) * * * (3) Knowledge—(i) In general. The tax return preparer must not know, or have reason to know, that any information used by the tax return preparer in determining the taxpayer’s eligibility to file as head of household or in determining the taxpayer’s eligibility for, or the amount of, any credit described in paragraph (a) of this section and claimed on the return or claim for refund is incorrect. The tax return preparer may not ignore the implications of information furnished to, or known by, the tax return preparer, and must make reasonable inquiries if a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. The tax return preparer must also contemporaneously document in the preparer’s paper or electronic files any inquiries made and the responses to those inquiries. (ii) Examples. The provisions of paragraph (b)(3)(i) of this section are illustrated by the following examples: Example 1. In 2018, Q, a 22 year-old taxpayer, engages Preparer C to prepare Q’s 2017 federal income tax return. Q completes Preparer C’s standard intake questionnaire and states that she has never been married and has two sons, ages 10 and 11. Based on the intake sheet and other information that Q provides, including information that shows that the boys lived with Q throughout 2017, Preparer C believes that Q may be eligible to claim each boy as a qualifying child for purposes of the EIC and the CTC. However, Q provides no information to Preparer C, and Preparer C does not have any information from other sources, to verify the relationship between Q and the boys. To meet the knowledge requirement in paragraph (b)(3) of this section, Preparer C must make VerDate Sep<11>2014 17:43 Jul 17, 2018 Jkt 244001 reasonable inquiries to determine whether each boy is a qualifying child of Q for purposes of the EIC and the CTC, including reasonable inquiries to verify Q’s relationship to the boys, and Preparer C must contemporaneously document these inquiries and the responses. Example 2. Assume the same facts as in Example 1 of this paragraph (b)(3)(ii). In addition, as part of preparing Q’s 2017 federal income tax return, Preparer C made sufficient reasonable inquiries to verify that the boys were Q’s legally adopted children. In 2019, Q engages Preparer C to prepare her 2018 federal income tax return. When preparing Q’s 2018 federal income tax return, Preparer C is not required to make additional inquiries to determine the boys relationship to Q for purposes of the knowledge requirement in paragraph (b)(3) of this section. Example 3. In 2018, R, an 18 year-old taxpayer, engages Preparer D to prepare R’s 2017 federal income tax return. R completes Preparer D’s standard intake questionnaire and states that she has never been married, has one child, an infant, and that she and her infant lived with R’s parents during part of the 2017 tax year. R also provides Preparer D with a Form W–2 showing that she earned $10,000 during 2017. R provides no other documents or information showing that R earned any other income during the tax year. Based on the intake sheet and other information that R provides, Preparer D believes that R may be eligible to claim the infant as a qualifying child for the EIC and the CTC. To meet the knowledge requirement in paragraph (b)(3) of this section, Preparer D must make reasonable inquiries to determine whether R is eligible to claim these credits, including reasonable inquiries to verify that R is not a qualifying child of her parents (which would make R ineligible to claim the EIC) or a dependent of her parents (which would make R ineligible to claim the CTC), and Preparer D must contemporaneously document these inquiries and the responses. Example 4. The facts are the same as the facts in Example 3 of this paragraph (b)(3)(ii). In addition, Preparer D previously prepared the 2017 joint federal income tax return for R’s parents. Based on information provided by R’s parents, Preparer D has determined that R is not eligible to be claimed as a dependent or as a qualifying child for purposes of the EIC or CTC on R’s parents’ return. Therefore, for purposes of the knowledge requirement in paragraph (b)(3) of this section, Preparer D is not required to make additional inquiries to determine that R is not her parents’ qualifying child or dependent. Example 5. In 2019, S engages Preparer E to prepare his 2018 federal income tax return. During Preparer E’s standard intake interview, S states that he has never been married and that his niece and nephew lived with him for part of the 2018 taxable year. Preparer E believes S may be eligible to file as head of household and claim each of these PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 children as a qualifying child for purposes of the EIC and the CTC. To meet the knowledge requirement in paragraph (b)(3) of this section, Preparer E must make reasonable inquiries to determine whether S is eligible to file as head of household and whether each child is a qualifying child for purposes of the EIC and the CTC, including reasonable inquiries about the children’s residency, S’s relationship to the children, the children’s income, the sources of support for the children, and S’s contribution to the payment of costs related to operating the household, and preparer E must contemporaneously document these inquiries and the responses. Example 6. W engages Preparer F to prepare her federal income tax return. During Preparer F’s standard intake interview, W states that she is 50 years old, has never been married, and has no children. W further states to Preparer F that during the tax year she was self-employed, earned $10,000 from her business, and had no business expenses or other income. Preparer F believes W may be eligible for the EIC. To meet the knowledge requirement in paragraph (b)(3) of this section, Preparer F must make reasonable inquiries to determine whether W is eligible for the EIC, including reasonable inquiries to determine whether W’s business income and expenses are correct, and Preparer F must contemporaneously document these inquiries and the responses. Example 7. Y, who is 32 years old, engages Preparer G to prepare his federal income tax return. Y completes Preparer G’s standard intake questionnaire and states that he has never been married. As part of Preparer G’s client intake process, Y provides Preparer G with a copy of the Form 1098–T Y received showing that University M billed $4,000 of qualified tuition and related expenses for Y’s enrollment or attendance at the university and that Y was at least a half-time undergraduate student. Preparer G believes that Y may be eligible for the AOTC. To meet the knowledge requirements in paragraph (b)(3) of this section, Preparer G must make reasonable inquiries to determine whether Y is eligible for the AOTC, as Form 1098–T does not contain all the information needed to determine eligibility for the AOTC or to calculate the amount of the credit if Y is eligible, and contemporaneously document these inquiries and the responses. * * * * * (e) Applicability date. The rules of this section apply to tax returns and claims for refund for taxable years beginning after December 31, 2015, that are prepared on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. However, the rules relating to the determination of a taxpayer’s eligibility to file as head of household under section 2(b) apply to tax returns and claims for refund for taxable years beginning after December 31, 2017, that are prepared on or after the date of publication of the Treasury E:\FR\FM\18JYP1.SGM 18JYP1 Federal Register / Vol. 83, No. 138 / Wednesday, July 18, 2018 / Proposed Rules decision adopting these rules as final regulations in the Federal Register. proposed rulemaking, the Commission proposes the following revisions to the periodic reporting requirements found in 39 CFR part 3050. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2018–15351 Filed 7–13–18; 4:15 pm] BILLING CODE 4830–01–P POSTAL REGULATORY COMMISSION 39 CFR Part 3050 [Docket No. RM2018–2; Order No. 4706] Periodic Reporting Requirements Postal Regulatory Commission. Proposed rule. AGENCY: ACTION: The Commission is proposing revisions to the periodic reporting requirements codified in our regulations. This document informs the public of the proposed rules, invites public comment, and takes other administrative steps. DATES: Comments are due: August 17, 2018. ADDRESSES: Submit comments electronically via the Commission’s Filing Online system at http:// www.prc.gov. Those who cannot submit comments electronically should contact the person identified in the FOR FURTHER INFORMATION CONTACT section by telephone for advice on filing alternatives. FOR FURTHER INFORMATION CONTACT: David A. Trissell, General Counsel, at 202–789–6820. SUPPLEMENTARY INFORMATION: SUMMARY: Table of Contents amozie on DSK3GDR082PROD with PROPOSALS1 I. Introduction II. Background III. Comments IV. Analysis of Proposed Changes V. Solicitation of Comments VI. Conclusion I. Introduction On December 27, 2017, the Postal Service filed a request for the Commission to consider revisions to the periodic reporting requirements codified in 39 CFR part 3050.1 On January 5, 2018, the Commission established this docket and invited comments regarding the Postal Service’s proposed revisions.2 Based on comments received in response to the Commission’s advance notice of 1 United States Postal Service Petition for Rulemaking on Periodic Reporting, December 27, 2017 (Petition). 2 Advance Notice of Proposed Rulemaking to Revise Periodic Reporting Requirements, January 5, 2018 (Order No. 4347). VerDate Sep<11>2014 17:43 Jul 17, 2018 Jkt 244001 II. Background The Postal Accountability and Enhancement Act (PAEA) granted the Commission enhanced information gathering and reporting responsibilities. See 39 U.S.C. 3652(e)(1). The PAEA provides that the Commission shall prescribe the content and form of the public reports the Postal Service files with the Commission under section 3652. In Docket No. RM2008–4, the Commission approved its current periodic reporting requirements.3 On December 27, 2017, the Postal Service filed a request for the Commission to consider revisions to the periodic reporting requirements. First, the Postal Service requests that the Commission adjust the deadlines for the quarterly Revenue, Pieces, and Weight (RPW) report; the Quarterly Statistics Report (QSR); the quarterly Billing Determinants report; and the monthly National Consolidated Trial Balance and Revenue and Expense Summary (Trial Balance) report to align the deadlines with other financial reporting deadlines. Petition at 1. The Postal Service states that aligning these deadlines with other financial reporting deadlines will avoid potential restatements of the earlier filed reports once the data for the later filed reports are finalized. Id. at 3. Specifically, the Postal Service seeks to move the quarterly and year-end deadlines for the RPW and QSR reports so that they are the same as the Form 10–Q and Form 10–K due dates. Id. at 2–3. In addition, the Postal Service requests that the Commission extend deadlines for quarterly Billing Determinants reports to 60 days after the end of Quarters 1, 2, and 3, and 90 days after the end of Quarter 4.4 The Postal Service also requests that the Commission revise the periodic reporting rules so that the Trial Balance reports and the Monthly Summary Financial reports have the same deadline. Id. at 5–6. Second, the Postal Service requests that the Commission modify the format of the Monthly Summary Financial Report to make the report more 3 Docket No. RM2008–4, Notice of Final Rule Prescribing Form and Content of Periodic Reports, April 16, 2009 (Order No. 203). 4 Id. at 4. The Postal Service also requests that the Quarter 4 Billing Determinants report be incorporated into the annual Billing Determinants report rather than submitted as a standalone filing. Id. The Postal Service states that eliminating the standalone filing would help the Postal Service more effectively allocate scarce time and resources. Id. PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 33879 consistent with the Postal Service’s quarterly and annual financial reports. Id. at 1. The Postal Service states that the term ‘‘Operating Revenue’’ as used in Tables 1 and 2 of the Monthly Summary Financial Report does not correspond with its usage in its Form 10–K reports. Id. at 7. The Postal Service requests revisions to Tables 1 and 2 of the Monthly Summary Financial Report so that the items and amounts reported for total operating revenue reconcile on both tables and the breakdown for revenue more closely aligns with the format in its other financial reports.5 Third, the Postal Service requests that the Commission consider eliminating or modifying any reporting requirements that have become unnecessary or irrelevant since implementation of the current periodic reporting rules in 2009. Id. at 1. The Postal Service requests that the Commission consider eliminating or modifying these requirements to avoid imposing ‘‘unnecessary or unwarranted administrative effort and expense’’ on the Postal Service. Id. at 9 (citing 39 U.S.C. 3652(e)(1)). III. Comments On March 7, 2018, the Public Representative and United Parcel Service, Inc. (UPS) filed comments.6 On April 6, 2018, the Postal Service and the Parcel Shippers Association (PSA) filed reply comments.7 Public Representative. The Public Representative divides her discussion into two sections. First, she discusses the guiding principles the Commission should consider when revising its periodic reporting requirements. PR Comments at 2–4. Specifically, she observes that the PAEA outlines three guiding principles for the Commission to consider when determining the content and form of the Postal Service’s public reports submitted under 39 U.S.C. 3652. Id. at 2. The three guiding principles are whether the requirement ‘‘(A) provid[es] the public with timely, adequate information to assess the lawfulness of rates charged; (B) avoid[s] unnecessary or unwarranted administrative effort and expense on the 5 Id. The Postal Service also requests updating Table 2 to reflect the name change of Standard Mail to USPS Marketing Mail. Id. at 8. 6 Public Representative Comments on Advance Notice of Proposed Rulemaking to Revise Periodic Reporting Requirements, March 7, 2018 (PR Comments); Comments of United Parcel Service, Inc. on Advance Notice of Proposed Rulemaking to Revise Periodic Reporting Requirements, March 7, 2018 (UPS Comments). 7 Reply Comments of the United States Postal Service, April 6, 2018 (Postal Service Reply Comments); Reply Comments of the Parcel Shippers Association (PSA), April 6, 2018 (PSA Reply Comments). E:\FR\FM\18JYP1.SGM 18JYP1

Agencies

[Federal Register Volume 83, Number 138 (Wednesday, July 18, 2018)]
[Proposed Rules]
[Pages 33875-33879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15351]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-103474-18]
RIN 1545-BO63


Tax Return Preparer Due Diligence Penalty Under Section 6695(g)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking, partial withdrawal of notice of 
proposed rulemaking.

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SUMMARY: This document contains proposed regulations that amend 
portions of previously proposed regulations related to the tax return 
preparer penalty under section 6695(g) of the Internal Revenue Code 
(Code). These amendments to the previously proposed regulations are 
necessary to implement a recent law change that expands the scope of 
the tax return preparer due diligence penalty under section 6695(g) so 
that it applies with respect to eligibility to file a return or claim 
for refund as head of household. The proposed regulations affect tax 
return preparers.

DATES: Written or electronic comments and requests for a public hearing 
must be received by August 17, 2018.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-103474-18), Room 
5207, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through

[[Page 33876]]

Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
103474-18), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224, or sent electronically, via the 
Federal eRulemaking Portal at www.regulations.gov (IRS REG-103474-18).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Marshall French, 202-317-6845; concerning submissions of comments and 
requests for a public hearing, Regina Johnson, 202-317-6901 (not toll-
free numbers).

Paperwork Reduction Act

    The collection of information in current Sec.  1.6695-2 was 
previously reviewed and approved under control number 1545-1570. 
Control number 1545-1570 was discontinued in 2014, as the burden for 
the collection of information contained in Sec.  1.6695-2 is reflected 
in the burden for Form 8867, ``Paid Preparer's Due Diligence 
Checklist,'' under control number 1545-1629.

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 6695(g) of the Code regarding 
the tax return preparer due diligence requirements.
    Prior to 2016, section 6695(g) imposed a penalty on tax return 
preparers who fail to comply with due diligence requirements set forth 
in regulations prescribed by the Secretary with respect to determining 
eligibility for, or the amount of, the earned income credit (EIC). For 
tax years beginning after December 31, 2015, the scope of section 
6695(g) was expanded to apply the penalty to tax return preparers who 
fail to comply with due diligence requirements with respect to 
determining eligibility for, or the amount of, the child tax credit 
(CTC)/additional child tax credit (ACTC) and the American opportunity 
tax credit (AOTC). See section 207 of the Protecting Americans from Tax 
Hikes Act of 2015, Div. Q of Public Law 114-113 (129 Stat. 2242, 3082 
(2015)) (PATH Act). On December 5, 2016, final and temporary 
regulations (TD 9799, 81 FR 87444) with cross-referencing proposed 
regulations (REG-102952-16, 81 FR 87502) (2016 proposed regulations) 
were published in the Federal Register to reflect these changes.
    Effective for tax years beginning after December 31, 2017, section 
6695(g) was amended to further expand the scope of the penalty to tax 
return preparers who fail to comply with due diligence requirements 
with respect to determining eligibility to file as head of household 
(as defined in section 2(b)). See section 11001(b) of ``An Act to 
provide for reconciliation pursuant to titles II and V of the 
concurrent resolution on the budget for fiscal year 2018,'' Public Law 
115-97 (131 Stat. 2054, 2058 (2017)) (Act). This document contains 
proposed regulations to reflect this change.

Explanation of Provisions

    The proposed regulations contained in this document withdraw 
paragraphs (a), (b)(3), and (e) of Sec.  1.6695-2 of the 2016 proposed 
regulations and propose in their place new paragraphs (a), (b)(3), and 
(e) of Sec.  1.6695-2 (amended paragraphs). The amended paragraphs 
update the 2016 proposed regulations to reflect the recent change in 
the law that expands the tax return preparer due diligence requirements 
under section 6695(g) to apply to determining eligibility to file as 
head of household. Accordingly, the proposed regulations contained in 
this document amend paragraphs (a) and (b)(3) of Sec.  1.6695-2 of the 
2016 proposed regulations by adding a reference to determining 
eligibility to file as head of household where reference is made to 
determining eligibility for, or the amount of, the EIC, the CTC/ACTC 
and/or the AOTC. In addition, Example 5 in paragraph (b)(3)(ii) of 
Sec.  1.6695-2 of the 2016 proposed regulations is revised to 
demonstrate how head of household due diligence requirements are 
intertwined with the rules for determining a taxpayer's eligibility for 
the CTC.
    A new example is also added to Sec.  1.6695-2(a)(2) to illustrate 
how the penalty applies if there is a failure to satisfy the due 
diligence requirements with respect to determining eligibility to file 
as head of household in addition to a failure to satisfy the due 
diligence requirements with respect to one of the applicable credits. 
As explained in the preamble of the 2016 temporary regulations, the 
preparation of one return or claim for refund may result in the 
imposition of more than one penalty under section 6695(g). That is 
because under section 6695(g), each failure to comply with the due 
diligence requirements set forth in regulations prescribed by the 
Secretary results in a separate penalty. To illustrate this point, a 
new example, Example 3, is added to proposed Sec.  1.6695-2(a)(2) 
contained in this document.
    The applicability date in Sec.  1.6695-2(e) is also updated to 
reflect the effective date of the addition of determining eligibility 
to file as head of household to the due diligence requirements. 
Accordingly, proposed Sec.  1.6695-2(e) contained in this document 
provides that Sec.  1.6695-2 applies to tax returns and claims for 
refund for taxable years beginning after December 31, 2015, that are 
prepared on or after the date of publication of the Treasury decision 
adopting the proposed rules as final regulations in the Federal 
Register. However, the rules relating to the determination of a 
taxpayer's eligibility to file as head of household under section 2(b) 
apply to tax returns and claims for refund for taxable years beginning 
after December 31, 2017, that are prepared on or after the date of 
publication of the Treasury decision adopting the proposed rules as 
final regulations in the Federal Register.
    As part of satisfying the due diligence requirements, the 
regulations under Sec.  1.6695-2 require tax return preparers to 
complete the Form 8867, ``Paid Preparer's Due Diligence Checklist,'' 
and, in most cases, attach it to the relevant return or claim for 
refund as part of satisfying the section 6695(g) due diligence 
requirements. The Form 8867 underwent significant revisions for the 
2016 tax year and is currently a single checklist to be used for all 
applicable credits (namely, the EIC, the CTC/ACTC, and the AOTC) on the 
return or claim for refund subject to the section 6695(g) due diligence 
requirements. It is anticipated that the IRS will revise the Form 8867 
to include the head of household filing status in time for the 2019 
filing season.

Proposed Applicability Dates

    Proposed Sec.  1.6695-2(e) provides that the rules in this notice 
of proposed rulemaking with respect to determining eligibility to file 
as head of household under section 2(b) will apply to tax returns and 
claims for refund for taxable years beginning after December 31, 2017, 
that are prepared on or after the date the final regulations are 
published in the Federal Register.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations. Under the 
Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby 
certified that these proposed rules, if adopted, would not

[[Page 33877]]

have a significant economic impact on a substantial number of small 
entities. When an agency issues a notice of proposed rulemaking, the 
RFA requires the agency to ``prepare and make available for public 
comment an initial regulatory flexibility analysis'' that will 
``describe the impact of the proposed rule on small entities.'' (5 
U.S.C. 603(a)). Section 605 of the RFA provides an exception to this 
requirement if the agency certifies that the proposed rulemaking will 
not have a significant economic impact on a substantial number of small 
entities.
    The proposed rules affect paid tax return preparers who determine a 
taxpayer is eligible to file as head of household, in addition to those 
tax return preparers who determine eligibility for, or the amount of, 
the EIC, the CTC/ACTC, and/or the AOTC. The North American Industry 
Classification System (NAICS) code that relates to tax return 
preparation services (NAICS code 541213) is the appropriate code for 
tax return preparers subject to this notice of proposed rulemaking. 
Entities identified as tax return preparation services are considered 
small under the Small Business Administration size standards (13 CFR 
121.201) if their annual revenue is less than $20.5 million. The IRS 
estimates that approximately 75 to 85 percent of the 505,000 persons 
who work at firms or are self-employed tax return preparers are 
operating as or employed by small entities. The IRS has therefore 
determined that these proposed rules will have an impact on a 
substantial number of small entities.
    The IRS has further determined, however, that the economic impact 
on entities affected by the proposed rules will not be significant. The 
current final and temporary regulations under section 6695(g) already 
require tax return preparers to complete the Form 8867 when a return or 
claim for refund includes a claim of the EIC, the CTC/ACTC, and/or the 
AOTC. Tax return preparers also must currently maintain records of the 
checklists and computations, as well as a record of how and when the 
information used to compute the credits was obtained by the tax return 
preparer. The information needed to document a taxpayer's eligibility 
to file as head of household is information the preparer must gather to 
file the return. Even if certain preparers are required to maintain the 
checklists and complete Form 8867 for the first time, the IRS estimates 
that the total time required should be minimal for these tax return 
preparers. Further, the IRS does not expect that the requirements in 
these proposed regulations would necessitate the purchase of additional 
software or equipment in order to meet the additional information 
retention requirements.
    Based on these facts, the IRS hereby certifies that the collection 
of information contained in this notice of proposed rulemaking will not 
have a significant economic impact on a substantial number of small 
entities. Accordingly, a Regulatory Flexibility Analysis is not 
required.
    Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on the 
impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written and electronic comments that 
are timely submitted to the IRS as prescribed in this preamble under 
the ADDRESSES heading. The Treasury Department and the IRS request 
comments on all aspects of the proposed rules. All comments will be 
available at www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal author of these regulations is Rachel Gregory of the 
Office of the Associate Chief Counsel (Procedure and Administration).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Partial Withdrawal of a Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, Sec.  1.6695-
2(a), (b)(3), and (e) of the notice of proposed rulemaking (REG-102952-
16) published in the Federal Register on December 5, 2016 (81 FR 87502) 
are withdrawn.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Section 1.6695-2 is amended by revising the section heading and 
paragraphs (a), (b)(3), and (e) to read as follows:


Sec.  1.6695-2  Tax return preparer due diligence requirements for 
certain returns and claims.

    (a) Penalty for failure to meet due diligence requirements--(1) In 
general. A person who is a tax return preparer (as defined in section 
7701(a)(36)) of a tax return or claim for refund under the Internal 
Revenue Code who determines the taxpayer's eligibility to file as head 
of household under section 2(b), or who determines the taxpayer's 
eligibility for, or the amount of, the child tax credit (CTC)/
additional child tax credit (ACTC) under section 24, the American 
opportunity tax credit (AOTC) under section 25A(i), or the earned 
income credit (EIC) under section 32, and who fails to satisfy the due 
diligence requirements of paragraph (b) of this section will be subject 
to a penalty as prescribed in section 6695(g) (indexed for inflation 
under section 6695(h)) for each failure. A separate penalty applies to 
a tax return preparer with respect to the head of household filing 
status determination and to each applicable credit claimed on a return 
or claim for refund for which the due diligence requirements of this 
section are not satisfied and for which the exception to penalty 
provided by paragraph (d) of this section does not apply.
    (2) Examples. The provisions of paragraph (a)(1) of this section 
are illustrated by the following examples:


    Example 1. Preparer A prepares a federal income tax return for a 
taxpayer claiming the CTC and the AOTC. Preparer A did not meet the 
due diligence requirements under this section with respect to the 
CTC or the AOTC claimed on the taxpayer's return. Unless the 
exception to penalty provided by paragraph (d) of this section 
applies, Preparer A is subject to two penalties under section 
6695(g): One for failure to meet the due diligence requirements for 
the CTC and a second penalty for failure to meet the due diligence 
requirements for the AOTC.

    Example 2. Preparer B prepares a federal income tax return for a 
taxpayer claiming the CTC and the AOTC. Preparer B did not meet the 
due diligence requirements under this section with respect to the 
CTC claimed on the taxpayer's return, but Preparer B did meet the 
due diligence requirements under this section with respect to the 
AOTC claimed on the taxpayer's return. Unless the exception to 
penalty provided by paragraph (d) of this section applies, Preparer 
B is subject to one penalty under section 6695(g) for the failure to 
meet the due diligence requirements for the CTC. Preparer B is not

[[Page 33878]]

subject to a penalty under section 6695(g) for failure to meet the 
due diligence requirements for the AOTC.

    Example 3. Preparer C prepares a federal income tax return for a 
taxpayer using the head of household filing status and claiming the 
CTC and the AOTC. Preparer C did not meet the due diligence 
requirements under this section with respect to the head of 
household filing status and the CTC claimed on the taxpayer's 
return. Preparer C did meet the due diligence requirements under 
this section with respect to the AOTC claimed on the taxpayer's 
return. Unless the exception to penalty provided by paragraph (d) of 
this section applies, Preparer C is subject to two penalties under 
section 6695(g) for the failure to meet the due diligence 
requirements: One for the head of household filing status and one 
for the CTC. Preparer C is not subject to a penalty under section 
6695(g) for failure to meet the due diligence requirements for the 
AOTC.

    (b) * * *
    (3) Knowledge--(i) In general. The tax return preparer must not 
know, or have reason to know, that any information used by the tax 
return preparer in determining the taxpayer's eligibility to file as 
head of household or in determining the taxpayer's eligibility for, or 
the amount of, any credit described in paragraph (a) of this section 
and claimed on the return or claim for refund is incorrect. The tax 
return preparer may not ignore the implications of information 
furnished to, or known by, the tax return preparer, and must make 
reasonable inquiries if a reasonable and well-informed tax return 
preparer knowledgeable in the law would conclude that the information 
furnished to the tax return preparer appears to be incorrect, 
inconsistent, or incomplete. The tax return preparer must also 
contemporaneously document in the preparer's paper or electronic files 
any inquiries made and the responses to those inquiries.
    (ii) Examples. The provisions of paragraph (b)(3)(i) of this 
section are illustrated by the following examples:


    Example 1. In 2018, Q, a 22 year-old taxpayer, engages Preparer 
C to prepare Q's 2017 federal income tax return. Q completes 
Preparer C's standard intake questionnaire and states that she has 
never been married and has two sons, ages 10 and 11. Based on the 
intake sheet and other information that Q provides, including 
information that shows that the boys lived with Q throughout 2017, 
Preparer C believes that Q may be eligible to claim each boy as a 
qualifying child for purposes of the EIC and the CTC. However, Q 
provides no information to Preparer C, and Preparer C does not have 
any information from other sources, to verify the relationship 
between Q and the boys. To meet the knowledge requirement in 
paragraph (b)(3) of this section, Preparer C must make reasonable 
inquiries to determine whether each boy is a qualifying child of Q 
for purposes of the EIC and the CTC, including reasonable inquiries 
to verify Q's relationship to the boys, and Preparer C must 
contemporaneously document these inquiries and the responses.

    Example 2. Assume the same facts as in Example 1 of this 
paragraph (b)(3)(ii). In addition, as part of preparing Q's 2017 
federal income tax return, Preparer C made sufficient reasonable 
inquiries to verify that the boys were Q's legally adopted children. 
In 2019, Q engages Preparer C to prepare her 2018 federal income tax 
return. When preparing Q's 2018 federal income tax return, Preparer 
C is not required to make additional inquiries to determine the boys 
relationship to Q for purposes of the knowledge requirement in 
paragraph (b)(3) of this section.

    Example 3. In 2018, R, an 18 year-old taxpayer, engages Preparer 
D to prepare R's 2017 federal income tax return. R completes 
Preparer D's standard intake questionnaire and states that she has 
never been married, has one child, an infant, and that she and her 
infant lived with R's parents during part of the 2017 tax year. R 
also provides Preparer D with a Form W-2 showing that she earned 
$10,000 during 2017. R provides no other documents or information 
showing that R earned any other income during the tax year. Based on 
the intake sheet and other information that R provides, Preparer D 
believes that R may be eligible to claim the infant as a qualifying 
child for the EIC and the CTC. To meet the knowledge requirement in 
paragraph (b)(3) of this section, Preparer D must make reasonable 
inquiries to determine whether R is eligible to claim these credits, 
including reasonable inquiries to verify that R is not a qualifying 
child of her parents (which would make R ineligible to claim the 
EIC) or a dependent of her parents (which would make R ineligible to 
claim the CTC), and Preparer D must contemporaneously document these 
inquiries and the responses.

    Example 4. The facts are the same as the facts in Example 3 of 
this paragraph (b)(3)(ii). In addition, Preparer D previously 
prepared the 2017 joint federal income tax return for R's parents. 
Based on information provided by R's parents, Preparer D has 
determined that R is not eligible to be claimed as a dependent or as 
a qualifying child for purposes of the EIC or CTC on R's parents' 
return. Therefore, for purposes of the knowledge requirement in 
paragraph (b)(3) of this section, Preparer D is not required to make 
additional inquiries to determine that R is not her parents' 
qualifying child or dependent.

    Example 5. In 2019, S engages Preparer E to prepare his 2018 
federal income tax return. During Preparer E's standard intake 
interview, S states that he has never been married and that his 
niece and nephew lived with him for part of the 2018 taxable year. 
Preparer E believes S may be eligible to file as head of household 
and claim each of these children as a qualifying child for purposes 
of the EIC and the CTC. To meet the knowledge requirement in 
paragraph (b)(3) of this section, Preparer E must make reasonable 
inquiries to determine whether S is eligible to file as head of 
household and whether each child is a qualifying child for purposes 
of the EIC and the CTC, including reasonable inquiries about the 
children's residency, S's relationship to the children, the 
children's income, the sources of support for the children, and S's 
contribution to the payment of costs related to operating the 
household, and preparer E must contemporaneously document these 
inquiries and the responses.

    Example 6. W engages Preparer F to prepare her federal income 
tax return. During Preparer F's standard intake interview, W states 
that she is 50 years old, has never been married, and has no 
children. W further states to Preparer F that during the tax year 
she was self-employed, earned $10,000 from her business, and had no 
business expenses or other income. Preparer F believes W may be 
eligible for the EIC. To meet the knowledge requirement in paragraph 
(b)(3) of this section, Preparer F must make reasonable inquiries to 
determine whether W is eligible for the EIC, including reasonable 
inquiries to determine whether W's business income and expenses are 
correct, and Preparer F must contemporaneously document these 
inquiries and the responses.

    Example 7. Y, who is 32 years old, engages Preparer G to prepare 
his federal income tax return. Y completes Preparer G's standard 
intake questionnaire and states that he has never been married. As 
part of Preparer G's client intake process, Y provides Preparer G 
with a copy of the Form 1098-T Y received showing that University M 
billed $4,000 of qualified tuition and related expenses for Y's 
enrollment or attendance at the university and that Y was at least a 
half-time undergraduate student. Preparer G believes that Y may be 
eligible for the AOTC. To meet the knowledge requirements in 
paragraph (b)(3) of this section, Preparer G must make reasonable 
inquiries to determine whether Y is eligible for the AOTC, as Form 
1098-T does not contain all the information needed to determine 
eligibility for the AOTC or to calculate the amount of the credit if 
Y is eligible, and contemporaneously document these inquiries and 
the responses.
* * * * *
    (e) Applicability date. The rules of this section apply to tax 
returns and claims for refund for taxable years beginning after 
December 31, 2015, that are prepared on or after the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register. However, the rules relating to the 
determination of a taxpayer's eligibility to file as head of household 
under section 2(b) apply to tax returns and claims for refund for 
taxable years beginning after December 31, 2017, that are prepared on 
or after the date of publication of the Treasury

[[Page 33879]]

decision adopting these rules as final regulations in the Federal 
Register.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-15351 Filed 7-13-18; 4:15 pm]
 BILLING CODE 4830-01-P